Chancellor Rachel Reeves has is reported to be watering down plans to raise tax through the imposition of of a national insurance equivalent levy on limited liability partnerships. First reported in The Times, it had been suggested efforts to raise revenue could include a new charge on LLPs which are not currently subject to national insurance; the new tax could be levied at a slightly lower rate than the employers’ rate of national insurance.
But following lobbying from professionals services sectors the Financial Times has reported the plans could be watered down.
Responding to the proposals last week Law Society vice president Brett Dixon warned ‘poorly designed tax burdens could stifle investment, recruitment and innovation, which would ultimately reduce jobs, secure livelihoods and access to justice when we need it’. He added the UK legal sector is ‘a global powerhouse’ employing more than half a million people and exporting more than £9 billion in services.
Instead of levying the tax on partner profits, which could affect 200,000 people and raise £1.9bn a year if applied at the usual rate of 15%, the Financial Times reports a lower rate is being considered; although it is acknowledged the policy could force behavioural changes which would limit the impact of the policy. Another measure being considered is a salary exemption, exempting partners paid below a certain level.
Responding to the news Dixon said the chancellor should now ‘sit down and talk to the sectors affected by her LLP tax proposals.’
“This rumoured partial retreat in the face of industry concerns shows that she should be engaging with the legal and other sectors about this. Right now, nobody is any wiser about the potential impact of the reported revised proposal. It could be just as bad and just as harmful to economic growth.”
“The Law Society would welcome more equity in the tax system but without full economic analysis and consultation, the sector remains concerned that tax hikes will damage the growth and competitiveness of the UK. Any tax increase could be distortive and damaging to the professional services sector.”
Reeves took the unusual step of issuing a ‘scene setter’ speech last week providing the clearest indication yet sizeable tax rises are on the way, with speculation rife manifesto-breaking increases to income tax are on the way.
Alongside changes to the unpopular agricultural and business property relief proposals; caps on lifetime gifting and/or considering change to the current taper rate; and a mansion tax that could see the current exemption from capital gains tax (CGT) under private residence relief end for properties above a certain threshold it has been further reported the current benefits enjoyed by salary sacrifice pension schemes could be targeted.
There is currently no limit on how much money an employee can put into their salary sacrifice pension scheme before they are taxed national insurance. It is understood a cap on the amount of salary that can be sacrificed without incurring national insurance payments at £2,000 a year. Pension contributions over that level would be taxed at the full rate of NI (8%) if the salary is less then £50,000 a year, and 2% on income above that.
It is set to be a double hit as employers would also lose the tax break that allows them to fund more generous employer pension contributions. As it stand firms running salary sacrifice pension scheme do not pay employer national insurance tax on the proportion of salaries that go into workers’ pensions. Under these plans, that exemption would be limited.
